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Advanced Micro Devices Inc (AMD) posted strong Q2 growth and robust operating and free cash flow margins. That has led to a higher stock price today. Interestingly some large, unusual put options trades are now in-the-money.
AMD stock is up $5.78 or +4.28% at $144.38 per share in mid-day trading on July 31. Yesterday the company released its Q2 earnings results, showing +8.88% higher revenue on a Y/Y basis, and up 7% on a Q/Q basis.
The market likes this as the revenue and strong operating profits are powered by strong demand from AI-driven data center sales. AMD said its data center sales were up 115% Y/Y and 21.3% compared to last quarter. Moreover, its data operating sales now account for almost half its total revenue (48.6%).
As a result, the company's operating income surged from $36 million last quarter to $269 million in Q2. More importantly, its free cash flow (FCF) rose from $379 million last quarter to $439 million in Q2.
Large, Unusual Put Options Trades Show Bullish Sentiment
This has made the market very positive about the company's outlook. As a result, some very unusual and large put option trades have occurred today.
This can be seen in today's Barchart Unusual Stock Options Activity Report. It shows that 3 sets of in-the-money (ITM) put option tranches have traded, as can be seen in the table below.
These put options are in-the-money since the strike prices are higher than the spot price. For example, the $149 strike price is $4.47 higher than the market price of $144.53. As a result, the price of the put option is at least $5.50 on the bid side (i.e., if you were to sell short this put). To buy the put option you have to pay $5.60.
In other words, the breakeven price for the buyer is $149-$5.60, or $143.40, or $1.13 lower than today's price. The only reason you would buy these in-the-money puts is if you felt somewhat strongly that the stock would stay below $149 but possibly fall below $143.40.
That is, you might not be so bearish on the stock, so you are willing to buy a put that is mostly already profitable. The most you could lose today if AMD stock stayed flat, is $5.60-$4.47, or $1.13, or 20.2% of your investment.
Short Put Trades are Bullish
On the other hand, the short sellers of these in-the-money puts already have a profit. They receive $5.50 immediately, for an immediate yield of 3.69% (i.e., $5.50/$149.00). Moreover, their breakeven price is $149-$5.50, or $143.50, or $1.03 below today's price. That is 0.71% out-of-the-money. So, if the stock stays flat by expiration, the net yield is $1.03/$149, or $0.69%.
Moreover, the short-put investor would be forced to buy 100 shares at $149. However, they may feel the stock is undervalued and be willing to keep holding the shares, especially given the good results.
The bottom line is that investors seem bullish on AMD stock with these in-the-money put option trades.
Analysts are Bullish
Sell-side analysts have higher average price targets on AMD stock. For example, Yahoo! Finance shows that the average price target of 40 analysts is $189.80 per share. That is over 31% higher than today's stock price. In addition, Barchart's survey has a mean target price of $197.78, or +36.8% higher.
Moreover, AnaChart, a new-sell-side analyst tracking service, shows that 35 analysts who have written recently on AMD have a price target of $159.84. That is likely to rise over the next several days as analysts revise their recent price targets.
For example, analysts tracked by AnaChart with good track records on AMD stock already have $200 or higher price targets. This can be seen in the table below.
It shows, for example, that Matthey Ramsay, of TD Cowen, who has been right 95.8% of the time with his price targets has a $210 price target. That means he is highly confident the stock could rise over 45% from today's price. Other analysts also have high Price Targets Met Ratio metrics. They all have price targets over $200.
This could be one reason why these put option trades today are all in-the-money. The market seems to be very bullish on the stock, even on the put option side.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
